Alex Tolbert, an Entrepreneurs' Organization (EO) member in Nashville, is founder and CEO of Bernard Health, an Inc. 5000 company whose flagship product, BerniePortal, is an all-in-one HR platform for small employers supported by thousands of benefits professionals nationwide. We asked Alex how businesses can differentiate themselves with benefits packages. Here's what he shared:
A few years ago, I asked my brother and business partner, Brian, "Why do only 60 percent of employees sign up for our group healthcare plan?"
We had a good plan and weren't charging much for it. And as an HR and healthcare company, our team members know firsthand the value of having coverage.
Brian's answer surprised me: "Because they can stay on their parent's healthcare plan."
Most recent college grads don't care about your healthcare plan
Under the Affordable Care Act, individuals can stay on a parent's plan until age 26?and many job candidates do exactly that. As a result, trying to sell them on your healthcare plan will likely fail.
After the conversation with my brother, I dug deeper and discovered that one member of our sales team?let's call him John?had figured out that his dad paid $100 per month for John to be on the family's healthcare plan, while our company only charged $20 per month for coverage.
John asked his dad to drop him and give him $50 per month from the savings?pointing out that they'd both come out ahead. John's idea backfired: His dad dropped him but kept all of the savings.
When I asked around, some employees said the topic of healthcare plans hadn't come up with their parents yet. Several pointed out that they also had younger siblings, so it wouldn't save their parent any money to take them off the plan, because the parent would still elect "Employee + Family" to cover those younger siblings anyway.
If not healthcare, then what?
If you have more than about ten employees, you probably need to offer a group health plan. But don't expect it to distinguish your company during the interview process. Many candidates applying for positions at smaller employers take a "pass/fail" approach to healthcare plans?if you offer one, you pass; if you don't, you fail. Your plan may be 40 percent better than the competition, but that won't earn you extra credit with most candidates.
We knew this from experience gained through our company's benefits brokerage, so we thought carefully about offering something unique that would be meaningful and valuable to our team.
Before starting the company, I worked briefly in finance where I learned about the power of compounding interest over time. I figured a 401(k) would be valuable to employees?and even more so if the company contributed to it. Most small employers don't offer one, so it would certainly help us stand out.
The economics of offering a 401(k) plan
Technically, an employer can offer a 401(k) plan and not contribute to it. In addition to making the 401(k) less valuable to employees, though, that approach opens the employer up to additional administration costs and nondiscrimination testing.
The government gives employers "safe harbor" options to avoid such additional costs and testing. We considered two of them:
- Contribute three percent of salary for all eligible employees
- Offer a dollar-for-dollar match of up to four percent of salary for all eligible employees
We chose to contribute three percent of salary for all eligible employees.
Many small employers choose the second option, which seems like it would cost more but is actually less expensive. Why? Because many employees won't contribute their own money, so the employer isn't obligated to provide a match.
From our perspective, if we chose the second option and team members didn't contribute, they wouldn't get anything?which wasn't aligned with our intention of providing a valued benefit.
How we scaled into the cost
At the time we adopted our 401(k) plan, our payroll was about $4 million per year. Three percent of that is $120,000?a significant cost to absorb.
Fortunately, we found a way to scale into the cost. While the Affordable Care Act requires relatively short waiting periods before an employee is eligible for your health plan, employers can mandate a full year waiting period before an employee is eligible for a 401(k).
Adopting the one-year eligibility requirement lowered the cost of our new 401(k) benefit the year we implemented it to $70,000, instead of $120,000.
Since then, the cost has increased as our company has grown, but it's one that we can easily project and budget for. It's also produced huge benefits, which our team expects to continue to see for years to come.